Fed Rate Hike Bets Crash into Cooling Inflation Data

The Federal Reserve's rate hike bets are on a collision course with its own data. Swaps traders have pushed the odds of a September rate hike above 50%, up from around 35% before Fed Chairman Kevin Warsh's hawkish address in Jackson Hole, where he vowed to keep pressing until inflation is 'clearly' moving back to the 2% target.

Warsh gave a tough speech, but investors are getting ahead of themselves. A warning isn't a decision, and there is every route for Warsh to hold off on a hike at the central bank's meeting on September 15-16.

Inflation is easing rather than accelerating, with July's Consumer Price Index (CPI) rising 3.4% year-over-year, down from 3.5% in June, and a monthly gain of just 0.1%. The labour market is also a concern, with the US economy unexpectedly shedding 23,000 positions in July.

Warsh knows that raising rates now risks turning a soft patch into something harder to reverse. Politics adds another layer to the standoff, as Warsh was appointed by President Trump, who has pushed for cheaper borrowing and criticized his predecessor for moving too slowly on cuts.